Fundamental of Accounting

Sheet (5)
Tegara English
First year
Edited by/ Dr. magdy kamel
‫للتواصل على جروب الخاص كلمنى وتس اضيفك‬
Tel/ 01273949660
1 | Page Dr. Magdy Kamel tel/ 01273949660
 Chapter (3) adjusting the accounts
Timing Issues
1. Time Period Assumption:
 Also called periodicity assumption
 Accountants divide the economic life of a business into artificial time periods
 Accounting time periods are generally a month, a quarter, or a year.

Fiscal year vs. calendar year

 Fiscal year: Accounting time period that is one year in length
 Calendar year: January 1 to December 31

Accrual-Basis Accounting
 Transactions recorded in the periods in which the events occur
 Revenues are recognized when earned, rather than when cash is received.
 Expenses are recognized when incurred, rather than when paid.

Cash-Basis Accounting
 Revenues are recognized when cash is received.
 Expenses are recognized when cash is paid .

Cash-basis accounting is not in accordance / agreement with generally accepted

accounting principles (GAAP).

Revenue Recognition Principle

 Indicate that Companies recognize revenue in the accounting period in
which it is earned.
 In a service enterprise,
revenue is considered to be earned at the time the service is performed

Expense recognition principle (Matching Principle)

 Match expenses with revenues in the period when the company makes
efforts to generate those revenues.

2 | Page Dr. Magdy Kamel tel/ 01273949660

The basics of adjusting entries
 Adjusting entries make it possible to report correct amounts on the
balance sheet and on the income statement.

 A company must make adjusting entries every time it prepares financial

statements.

Notes
 Revenues - recorded in the period in which they are earned.
 Expenses - recognized in the period in which they are incurred.
 Adjusting entries - needed to ensure that the revenue recognition and
matching principles are followed.

Adjusting entries for deferrals

1. prepaid expenses: expense paid in cash and recorded as assets because
service or benefit will be received in the future before they are used or
consumed
2. unearned revenues : cash received and recorded as liabilities before
revenue is earned.

Example (1)
Pioneer Advertising Agency purchased advertising supplies costing $2,500 on
October 5. This account shows a balance of $2,500 in the October 31 trial
balance. An inventory count at the close of business on October 31 reveals
that $1,000 of supplies are still on hand.

Oct. Advertising supplies expense 1,500

31 Advertising supplies 1,500

Notes
 Advertising supplies expense (used) = 2,500 – 1,000 = 1,500 on I/S
 Advertising supplies (remaining) = 1,000 on B/S
3 | Page Dr. Magdy Kamel tel/ 01273949660
Example (2)
On October 4, Pioneer Advertising Agency paid $600 for a one-year fire
insurance policy. treatment began on October 1. This account shows a
balance of $600 in the October 31 trial balance. Insurance of $50 ($600 / 12)
expires each month.

Solution
Oct. 31 Insurance expense 50
Prepaid insurance 50

Notes
 Insurance expense ( used) = 50 on I/S
 Prepaid insurance ( remaining) = 600 – 50 = 550 on B/S

After the adjusting entries is posted, the account show:

Depreciation
 Depreciation is the process of allocating the cost of an assets to expense
over its useful life in a rational and systematic manner.
 Companies typically own Buildings, equipment, and vehicles.
 (long-lived assets) are recorded as assets, rather than an expense, in the
year acquired.
cost of fixed assetd - salvage value
 Depreciation expense = estimated useful life
 Book value of fixed assets = Cost of Fixed assets – Accumulated depreciation

Example (3)
Pioneer Advertising estimates depreciation on the office equipment to be
$480 a year, or $40 per month.
Solution
Oct. 31 Depreciation expense – equipment 40
Accumulated depreciation – equipment 40
Notes
4 | Page Dr. Magdy Kamel tel/ 01273949660
  Accumulated Depreciation is a contra asset account.
 Accumulated depreciation account appears just after the account it offsets
(Equipment) on the balance sheet.
 Its normal balance is a credit

Adjusting entries for Accruals

1. Accrued Revenues.
Revenues earned but not yet received in cash or recorded.

2. Accrued Expenses
Expenses incurred but not yet paid in cash or recorded

Example (1)
Pioneer Advertising Agency received $1,200 on October 2 from R. Knox for
advertising services expected to be completed by December 31. Unearned
Service Revenue shows a balance of $1,200 in the October 31 trial balance.
Analysis reveals that the company earned $400 of those fees in October

Solution
Oct Unearned revenue 400
.31 Service revenue 400

Notes:
 Service revenue = 400 on I/S
 Unearned service revenue = 1,200 – 400 = 800 on B/S

After the company posts the adjusting entries, the accounts show:

5 | Page Dr. Magdy Kamel tel/ 01273949660

Example (2)
In October Pioneer Advertising Agency earned $200 for advertising services
that had not been recorded.

Solution
Oct. 31 Accounts receivable 200
Service revenue 200

Example (3)
Pioneer Advertising Agency signed a three-month note payable in the amount
of $5,000 on October 1. The note requires Pioneer to pay interest at an annual
rate of 12%.
Prepare the adjusting entries at oct 31
Solution

Interest expense = 5,000 × 12% × 1/12 = $50

Oct. 31 Interest expense 50

Interest payable 50

Multi choose question

1. The time period assumption states that
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the enterprise's accounts can only be made in the time period
when the business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.

2. Adjustments would not be necessary if financial statements were prepared to reflect

net income from
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.

3. The time period assumption is also referred to as the

a. calendar assumption. b. cyclicity assumption.
c. periodicity assumption. d. fiscal assumption.

6 | Page Dr. Magdy Kamel tel/ 01273949660

4. Which of the following are in accordance with generally accepted accounting
principles?
a. Accrual basis accounting
b. Cash basis accounting
c. Both accrual basis and cash basis accounting
d. Neither accrual basis nor cash basis accounting

5. The revenue recognition principle dictates that revenue should be recognized in the
accounting records
a. when cash is received.
b. when it is earned.
c. at the end of the month.
d. in the period that income taxes are paid.

6. In a service-type business, revenue is considered earned

a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.

7. The matching principle matches

a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.

8. An adjusting entry
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.

9. Expenses incurred but not yet paid or recorded are called

a. prepaid expenses. b. accrued expenses.
c. interim expenses. d. unearned expenses.

10. Accrued revenues are

a. received and recorded as liabilities before they are earned.
b. earned and recorded as liabilities before they are received.
c. earned but not yet received or recorded.
d. earned and already received and recorded.

7 | Page Dr. Magdy Kamel tel/ 01273949660

11. Prepaid expenses are
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

12. Accrued expenses are

a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

13. Unearned revenues are

a. received and recorded as liabilities before they are earned.
b. earned and recorded as liabilities before they are received.
c. earned but not yet received or recorded.
d. earned and already received and recorded.

14. A liability—revenue relationship exists with

a. prepaid expense adjusting entries.
b. accrued expense adjusting entries.
c. unearned revenue adjusting entries.
d. accrued revenue adjusting entries.

15. Unearned revenue is classified as

a. an asset account.
b. a revenue account.
c. a contra-revenue account.
d. a liability.

16. If a business has received cash in advance of services performed and credits a liability
account, the adjusting entry needed after the services are performed will be
a. debit Unearned Revenue and credit Cash.
b. debit Unearned Revenue and credit Service Revenue.
c. debit Unearned Revenue and credit Prepaid Expense.
d. debit Unearned Revenue and credit Accounts Receivable.

17. Accumulated Depreciation is

a. an expense account. b. an owner's equity account.
c. a liability account. d. a contra asset account

8 | Page Dr. Magdy Kamel tel/ 01273949660

18. Depreciation is the process of
a. valuing an asset at its fair market value.
b. increasing the value of an asset over its useful life in a rational and
systematic manner.
c. allocating the cost of an asset to expense over its useful life in a rational
and systematic manner.
d. writing down an asset to its real value each accounting period.

19. An accumulated depreciation account

a. is a contra-liability account.
b. increases on the debit side.
c. is offset against total assets on the balance sheet.
d. has a normal credit balance

20. Quirk Company purchased office supplies costing $6,000 and debited Office Supplies
for the full amount. At the end of the accounting period, a physical count of office
supplies revealed $2,400 still on hand. The appropriate adjusting journal entry to be
made at the end of the period would be
a. Debit Office Supplies Expense, $2,400; Credit Office Supplies, $2,400.
b. Debit Office Supplies, $3,600; Credit Office Supplies Expense, $3,600.
c. Debit Office Supplies Expense, $3,600; Credit Office Supplies, $3,600.
d. Debit Office Supplies, $2,400; Credit Office Supplies Expense, $2,400

21. White Laundry Company purchased $6,500 worth of laundry supplies on June 2 and
recorded the purchase as an asset. On June 30, an inventory of the laundry supplies
indicated only $2,000 on hand. The adjusting entry that should be made by the company
on June 30 is
a. Debit Laundry Supplies Expense, $2,000; Credit Laundry Supplies, $2,000.
b. Debit Laundry Supplies, $2,000; Credit Laundry Supplies Expense, $2,000.
c. Debit Laundry Supplies, $4,500; Credit Laundry Supplies Expense, $4,500.
d. Debit Laundry Supplies Expense, $4,500; Credit Laundry Supplies, $4,500.

22. On July 1, Dexter Shoe Store paid $8,000 to Ace Realty for 4 months rent beginning
July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared
on July 31, the adjusting entry to be made by Dexter Shoe Store is
a. Debit Rent Expense, $8,000; Credit Prepaid Rent, $2,000.
b. Debit Prepaid Rent, $2,000; Credit Rent Expense, $2,000.
c. Debit Rent Expense, $2,000; Credit Prepaid Rent, $2,000.
d. Debit Rent Expense, $8,000; Credit Prepaid Rent, $8,000.

9 | Page Dr. Magdy Kamel tel/ 01273949660

23. Southeastern Louisiana University sold season tickets for the 2008 football season for
$160,000. A total of 8 games will be played during September, October and November. In
September, three games were played. The adjusting journal entry at September 30
a. is not required. No adjusting entries will be made until the end of the season in
November.
b. will include a debit to Cash and a credit to Ticket Revenue for $40,000.
c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for
$60,000.
d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for
$53,333.

24. Southeastern Louisiana University sold season tickets for the 2008 football season for
$160,000. A total of 8 games will be played during September, October and November. In
September, two games were played. In October, three games were played. The balance
in Unearned Revenue at October 31 is
a. $0.
b. $40,000.
c. $60,000.
d. $100,000.

25. Southeastern Louisiana University sold season tickets for the 2008 football season for
$160,000. A total of 8 games will be played during September, October and November.
Assuming all the games are played, the Unearned Revenue balance that will be reported
on the December 31 balance sheet will be
a. $0.
b. $60,000.
c. $100,000.
d. $160,000.

26. At March 1, 2008, Candy Inc. had supplies on hand of $500. During the month, Candy
purchased supplies of $1,200 and used supplies of $1,500. The March 31 adjusting journal
entry should include a
a. debit to the supplies account for $1,500.
b. credit to the supplies account for $500.
c. debit to the supplies account for $1,200.
d. credit to the supplies account for $1,500.

10 | Page Dr. Magdy Kamel tel/ 01273949660

27. Dorting Company purchased a computer system for $3,600 on January 1, 2008. The
company expects to use the computer system for 3 years. It has no salvage value.
Monthly depreciation expense on the asset is
a. $0.
b. $100.
c. $1,200.
d. $3,600.

28. Maple Tree Inc. purchased a 12-month insurance policy on March 1, 2008 for $900. At
March 31, 2008, the adjusting journal entry to record expiration of this asset will include
a. debit to Prepaid Insurance and a credit to Cash for $900.
b. debit to Prepaid Insurance and a credit to Insurance Expense for $100.
c. debit to Insurance Expense and a credit to Prepaid Insurance for $75
d. debit to Insurance Expense and a credit to Cash for $75.

29. Ogletree Enterprises purchased an 18-month insurance policy on May 31, 2008 for
$3,600. The December 31, 2008 balance sheet would report Prepaid Insurance of
a. $0 because Prepaid Insurance is reported on the Income Statement.
b. $1,400.
c. $2,200.
d. $3,600.

30. On January 1, 2008, M. Johnson Company purchased equipment for $30,000. The
company is depreciating the equipment at the rate of $700 per month. The book value of
the equipment at December 31, 2008 is
a. $0.
b. $8,400.
c. $21,600.
d. $30,000

11 | Page Dr. Magdy Kamel tel/ 01273949660